Planning on going owner-builder for your next home build or renovation project?
In this article, we’ll have a look at what happens if you decide to project manage the renovation or building construction on your own as an owner builder.
As an owner builder, you are subject to much more stringent and conservative credit assessment than a standard loan. Not all banks will advance funds at all to an owner builder. In fact, only around one-fifth of the banks on my panel lend to owner-builders.
In the event that the bank does lend, they tend to not advance as much of the property value to you and will often expect you to have a fairly large safety net in case the costs blow out unexpectedly.
These policies vary from lender to lender and this can mean that you have very large differences in borrowing power between lenders.
Banks have extensive requirements when going owner- builder
There are some documentation requirements that are typical to all loan applications (eg. Identification, income verification and statements on your existing liabilities). I’m not going to touch on these requirements, but rather focus on the requirements specified for owner builder construction lending. The one note I will make is that full income verification is usually required for these loans (there is no low doc options available in the owner-builder space unless it is for development purposes and treated as a commercial facility).
As a guide a few of the things a bank will request include:
- a copy of your approved plans. These could be actually approved by the local council or a private certifier in the instance of a complying development.
- a breakdown of your construction costs and copies of quotes supporting this breakdown. This can easily run into dozens of pages, unfortunately.
- A schedule of timing for the building works to be completed in
- A copy of your owner builder permit
- Certificates showing that you have appropriate insurances in place
As per the usual construction loan process, the lender will do a valuation on the proposed construction on an as if complete basis. This usually equals your land value plus your construction costs, not necessarily the true end value of the property.
As mentioned above, the banks will not go to 95% when you are an owner builder – the maximum you can typically expect is 80% with many lenders offering 60% or less of them as if complete valuation.
Other important points to consider as an owner-builder:
- It is absolutely vital to avoid starting construction until your loan is formally approved. If you start construction using your own funds and then go to get additional finance you will most likely find that the banks are not prepared to take on a partially completed project.
- You need to budget extremely carefully. Part of this is the upfront budget process which you supply to the bank as part of your application. It is very easy to blow this budget though through variations. Also typically the bank will only pay out on your progress claims once you complete each stage. They also will only be paying out once the items add value to the property, which means that you will have to fund some material purchases using your own money and get reimbursed once the next construction stage is completed.
If you have no experience in the building industry, get yourself someone who can assist with project management. The banks look favourably on experience within the industry when approving owner builder loans, so an accountant, for example, is less likely to be approved for a loan than say a carpenter. Having an experience building project manager can definitely help your chances at loan approval if you lack this experience yourself.
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